Pallas downplays new Vic credit rating hit

Moody's has stripped Victoria of its much-vaunted AAA credit rating as the state treasurer plays down the status loss.

The international ratings agency on Tuesday downgraded the state's rating to AA1 and changed its financial outlook to "negative".

Moody's blamed the state's huge post-pandemic debt bill for the downgrade, which according to treasury is forecast to triple to $154.8 billion in 2023/24.

"The downgrades reflect a marked erosion in Victoria's governance of its public finances, at a time when the state faces substantial operating deficits as it responds to the pandemic-induced economic disruptions and embarks on a significant capital spending program," Moody's John Manning said in a statement.

"As a result, the state's debt burden will rise sharply and remain elevated for the remainder of the decade."

Mr Manning says the "rapid and prolonged growth in debt" will "constrain the state's capacity to respond to future shocks".

In the climate of record-low interest rates, Treasurer Tim Pallas said the state government made "no apologies" for using its balance sheet to support Victorians.

"As the economy strengthens, our budget position will strengthen," he said in a statement on Tuesday.

"At the end of the day, our agency ratings are important, but they're not as important as seeing Victorian families and businesses through this crisis and making sure they have what they need to get through it."

The Victorian economy had been affected more than any other state or territory due to its second wave of COVID-19 and subsequent 112-day lockdown.

A third, five-day lockdown, due to an outbreak of the UK variant of the virus, ended on Thursday as new ABS labour force data revealed Victoria's unemployment rate fell 0.2 per cent to 6.3 per cent in January.

Mr Pallas said Moody's decision reflected the enormous impact the pandemic continues to have on economies across the globe.

"No one is immune from the impacts of the pandemic, but Victoria is more strongly placed than most jurisdictions in the world to recover," he said in a statement on Tuesday.

"The sacrifices of each and every Victorian in driving numbers down - and keeping them down - mean we can reopen and rebuild."

It comes after Standard & Poors downgraded the state's credit rating by two notches from AAA to AA in December, citing a weaker fiscal outlook due to the pandemic.

At the time, Mr Pallas said the loss of the rating was "eminently manageable" and would increase borrowing payments by about $10 million a year.

Shadow Treasurer Louise Staley said the agency downgrades would leave less money in the budget for roads, schools, hospitals and police.

"If you have a lot of debt and interest rates go up, so do your interest payments, cutting back on spending in other essential areas," she said.

Austrlaian Associated PressBack to Breaking News

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